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How to Fix the Retirement Savings Crisis

I was shocked to learn from a recent Employee Benefits Research Institute survey that only 58% of Americans are currently saving for retirement and 30% of workers say they have less than $1,000 in savings and investments. In addition, just 14% of American workers in this survey said they were very confident that they'd have enough money to live comfortably in retirement.

Clearly, Americans are not saving enough for retirement. Of course, anyone who talks with their friends and family about this topic knows this already. Many people I chat with say they'll just work "forever." Unfortunately, that's one of those ideas that sounds perfectly reasonable, but turns out to be completely delusional upon further examination.

According to the above-mentioned study, half of current retirees surveyed left the work force unexpectedly as a result of health problems, disability, or just losing their job. Do you really want your odds of a comfortable retirement to be the same as a coin flip?

Of course you don't. That's why each of us needs to save more, and then have a smart plan in place to invest those savings for the long haul. Finally, one of the best things you can do for your retirement is take better care of your health. The financial costs of poor health are significant, so living healthily is a key part of planning for a happy retirement.

A Social Security czar?One of the first things we must do to strengthen our retirement system is shore up Social Security, which remains a key part of most people's retirement strategy. In his recent book Clash of Cultures, John Bogle argues that it wouldn't be terribly difficult to fix Social Security, though he recognizes that gridlock in Washington, D.C., makes almost everything right now politically complicated. Bogle feels all we'd need is some combination of slight increases of revenues and other tweaks, while also gradually increasing the retirement age to, say, 69. He even offers up his services to Congress as a "czar" to implement those reforms. I think we should take him up on it.

Another retirement savings tierIn addition to Social Security reform, there are currently several initiatives designed to provide some sort of retirement plans for those who aren't currently covered by 401(k)s or other work-related plans. President Obama has introduced a plan for "Automatic Individual Retirement Accounts" while Sen. Tom Harkin has put forward "Rebuilding Pensions: Promise Funds."

According to the Center for Retirement Research, Harkin's plan would provide coverage for those workers who don't have access to an employer-sponsored plan. Both the Obama and the Harkin plans appear to address the need to increase savings for those who don't have employer-sponsored coverage. Anything that increases savings for all workers is something that should be carefully considered right now.

You're the boss of your financial futureAt the individual level, there are a lot of things that everyone can do to improve their retirement savings. My colleague Sara Murphy, in an article for this series, mentioned several suggestions for a fabulous retirement. People need to know how much money they'll need to retire comfortably, and then they need to devise a sound plan for achieving that goal.

This is where John Bogle's advice can be very helpful as well. In Clash of Cultures he laments the short-termism he sees when it comes to retirement savings. He notes that, within 401(k)s, there is too much turnover of fund investments, and too much gambling that certain fund managers can outperform the market. Most importantly, he believes the principle cause of inadequate returns is excessive costs that result from investing in actively managed mutual funds.

It should come as no surprise that one of the leading advocates of index funds recommends them highly for most individual retirement portfolios. But just because he's biased doesn't mean he's wrong. Personally, I think all of us could benefit by holding some index funds in our retirement portfolios. I also believe that almost all of us would benefit by increasing the percentage of our salary we devote to our 401(k) or other retirement plan. Increasing your savings and lowering your costs over a long time horizon is a pretty good recipe for growing your wealth.

Just say yes.We're facing a huge crisis in retirement savings in this country. Our government may or may not be able to address it sufficiently. Fortunately, there are things each of us can do on our own to take control of our financial futures.

This isn't just hypothetical for me, either. I'm turning 50 next month, and I'm woefully behind in my own retirement savings. I also have two children to educate, so clearly, I have some pretty serious financial challenges ahead of me.

Being in denial about those challenges isn't really an attractive option. I tried that approach already for approximately two decades, and found that it wasn't a particularly successful strategy. Instead, I've taken steps this past year to increase the amount I contribute each month to my 401(k). We also refinanced our house, and are tucking the savings away into investments for our kids' educations. Finally, I'm trying to do better when it comes to health and nutrition.

In 20 years, we just might be OK. Like a lot of folks, I intend to work forever. I'm just not betting the house that I will be able to work forever.

To read all of the articles in this series, click on the following links:

Comments from our Foolish Readers

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A SS czar? Are you regulatory liberal socialist crazy? I bet you're the sort of person who would put a pilot behind a ship's wheel rather than let a boat drift wherever it wanted to go. Woo hoo! Complete economic freedom! What could possibly go wrong in that ... An iceberg? Where? Well, I'm sure the boat will just drift away from it on its own in response to natural ocean forces.

I agree that SS is not a terribly difficult issue, apart from politics, and the idea of a SS czar makes sense to me.

However, I don't think I can go along with the idea of dumping massive new amounts of money into index funds. That idea can work well for individual investors, but I'm very nervous about drastically increasing the level of moral hazard in our markets. As we saw during our most recent financial crisis, elevated levels of moral hazard tend to eventually lead to really nasty consequences. When companies believe their stock has a solid floor under it no matter what they do, making risky bets becomes a dangerously enticing option.

There are several things Washington could do to bolster retirement savings, but they all cut into "revenue," so that will never happen. What about using IRA's, a well established vehicle, so that more than a measley $5000 a year can be put away? Remove the income limitations or at least regulate them so that at least what we're told we should be saving for retirement can be saved tax-free. Or even better yet, give us Roth IRA's with much higher contribution limits. Not everyone lives in the midwest where you can live comfortably on $50k a year. $200k a year may sound like a rich person to many, but in the Northeast, with a house, gas, kids, college, retirement, and oh yeah - eating! - it just about keeps you comfortable.

How about allowing a mixed portfolio of Roth and Traditional IRA's? With a higher combined limit than $5k.

I'd be happy for SS to go lower and phase out if I am able to save and invest on my own with expanded tax benefit.

Is anyone under 40 even expecting to get SS?? I am over 40 and I don't think I can rely on it being there for me. Not to mention - SS income is taxable - what a joke.

I am flabbergasted about all of the solutions being bandied about. The real reason people don't have retirement savings is that they don't earn enough money to put anything aside! None of the solutions proposed helps people who are just getting by!

If they really want to help us build our retirement, why not remove the caps on how much we can pump into our 401Ks?

If one is >40 and they have just started saving for retirement, it is going to be very difficult to get there on $17,000/yr even if the cap is indexed to inflation or what not. Why have a limit? I mean if they are really worried and all?

Some of the best advice I got was from my banker. Norm said, "Save for your own retirement, not for your children's college education."

I followed his recommendation and recommend it to others. Under the current formula's of FAFSA, spike your retirement savings when they are Juniors in High School. This made them eligible for more scholarships, low interest loans, etc.

By saving for my retirement, I hope that I am never a burden to my children. I suggest the John Reeves reexamine his current plan of action.

I talked to a real economist about this. I called it a pyramid scheme. He was nicer and called it a pay-as-you-go system.

Before 2010 there were 4 workers per retiree (4:1). Sometime after 2010 when Baby Boomers retire the ratio will change to three workers per retiree (3:1). The result is that to keep the same pay-as-you-go system the three workers must contribute 33% more to make up for the missing worker, or else the retirees must accept 25% less due to lost revenue. Or some combination of the two. All talk about "fixing" Social Security must revolve around these two points.

I state that SSA suffers two grave issues (1) funds are not invested in the private sector where they can earn more, and (2) political control. To illustrate the political problem consider this; congress LOWERED ssa contributions this tax year. If you understood the previous paragraph you know why this is so bad. Congress thinks of ssa as their personal piggy bank.

The obvious permanent solution is to privatize Social Security. It has already been done successfully years ago in Chili. All we have to do is copy their pattern, no reinventing needed! The person who did this is Jose Pinera. See en-dot-wikipedia-dot-org/wiki/José_Piñera or www-dot-cato-dot-org/people/jose-pinera.

eldetorre: Yours is the first completely honest statement I've seen in days.

BlueSkyLLC: My college tuition was $115 per semester. My string of minimum wage jobs during summers and paper route put me through living at home and paying expenses including a car and insurance. No loans, no scholarships, no grants.

If a kid can earn enough for his $5000 per semester tuition plus expenses, he already has a better paying job than most college graduates. I pity any working class family with college age kids who are not geniuses today. Amazing how our society has looked the other way while college tuition and fees have inflated 35-50 times while minimum wage rose 6 times. We have government backed borrowing to thank.

EDUCATION!!! Not k-12 or college, but teach your children early to save and live below their means regardless of their income.

eldetorre, I am sure this is the case for a handful, but I know many who earn plenty but claim they don't make enough to save, yet drive the fanciest (leased) cars available, eat out expensively most nights, have the best & biggest flat screens & every movie channel on cable, and the newest electronic gadgets.

I am blessed to have a pension plan at work and a 401k.I also agree with a previous poster that why are there limits on ira accounts?How can they say I am responsible for investing my savings and at the same time limit my investment options in my 401k to only the handfull of funds the investment baker allows you to invest in.Why shouldn't I be allowed to invest in any stock in the DOW,S&P or any fund out there.Not just the handful that's offered by the plan.

But to tell you the truth I'm not convinced if the market is really stable enough to depend upon.I mean really a country as small as Greece sends global market in a spiral.Where's the security in that system.I have yet to be convinced that the market itself is just a ponsi scheme.

I love investing in great companies with moats and so on but even they get trampled in the stampede.And these companies have BILLIONS of shares BILLIONS!!!

Given the dramatically shrinking worker-recipient ratio, means-testing SS benefits is what makes the most sense. However, in a world where the "47%" are already being castigated as moochers, having SS as a means-tested government benefit would make it a much easier target for demagoguery.

Our incessant political warfare is constantly preventing us from making intelligent choices.

To be honest, SS is not that great a problem. There is a chart over at Morgan Housel's "5 Huge Myths About Social Security" that lays it out for anyone who can read. This is via the CBO. "Effect of Policy Options....."

What we apparently have is too many lawyers in Washington who can't add, subtract or do other simple math. Nor can they make simple decisions. For most of them, they'll retire because of generous benefits afforded to them, courtesy of the taxpayer. So I suppose, that relieves them of the need to make these difficult decisions. For Congress, no matter what you do, it will probably turn out well for you, personally, in retirement.

Not so for the rest of us.

You and I will have to find another means for funding our retirement. That includes "living within our means" and saving the rest.

In the U.S. there seems to be a philosophy of "spending it all" and then for retirement, opening a bank account with the expectation of the movie "Field of Dreams." Such an account will magically accumulate and grow over time.

It won't, unless we put restraints on our personal spending, and fill that account with the monies not spent. It won't unless we say "no" to our children, who expect to go to the best schools. And for what purpose?

To my children and their college plans, I asked "How about "To earn a living and to make a difference on the planet?"" For the children, if they could not define how their college education and career path will achieve these objectives, then I suggested that they are wasting their time, and someone else's money. I also nixed those plans.

Is it an accident that the children, now grown and educated, currently are employed, have retirement savings and other savings? I don't think so.

You can save as much of your earnings as you wish. The government is not willing for you to do so "tax free" via a Roth.

I suggest you continue to save, and invest.

The government will get a slice of any interest you get on your savings, or any dividends you get from stocks that pay dividends.

That however, is no accuse for avoiding saving for the future. It is merely one of many headwinds that "savers" in our economy face.

I'd suggest that we each consider the alternatives. Would we rather be up to our eyeballs, and beyond in debt? Based upon everything I've read, my own personal experiences, and the comments in many, many Motley Fool articles, I am pretty clear that the "debtors" aren't happy with how it has turned out.

The choice is very simple. One can save, and face the responsibility of how to spend those savings as well as any SS benefits in retirement, or one can spend everything. Such a spender then must decide how to live, solely on the SS benefits they receive.

Romney is proposing tax free dividends, capital gains and interest on savings. With those incentives people should just open an investment account and start saving. Reinvest divdends. Unsophisticaed investors could just buy low cost index funds, combination of bonds and equities.

If Obama wins we should create a tax free savings account that citizens can open at birth. Canada now has tax free savings avounts. We should also allow money (owned by the citizen) to come from any source not just earnings. Gifts, inheritance, other. Mom or grandma gives a $500 give to child. It is treated like an IRA where a person can buy anytype of an investment like in an IRA. Most people don't realize they are paying 13.5% (less the 2% current temporary reduction) of their earnings into SSA which in 2037 will only pay out 75% of the benefit payment. However, the govt has missed every estimate its ever put out. So I am not confident I'll get much. But 13.5% is a lot for the amount of return.

I wonder how much of our current economic situation is people over 50 who otherwise would be a significant consumer group to grow the economy figuring out they need to deleverage and save for their retirement.

Without consumers there is no economy. Those people who haven't figured out they need to stop spending so much and saving more are the ones keeping this economy in motion.

Don't need a vacation? Fine. How many people does that put out of work? Don't need to go out to eat? Fine. How many people does that put out of work. Don't need to buy new clothing? Fine, how many people does that put out of work. Don't buy a new car? Fine. How many people does that put out of work.

We can probably get back to our agrarian economy roots if we really save enough. Of course I'm not sure what will be being saved as 95% of the people won't have any income to save.

And the truth is 75%+ of the people are not going to save for retirement unless it's mandated. Just accept it.

I do agree the 401K and IRA limits should be removed. At least the traditional and Roth limits should additive rather than concurrent. I also think the 6% matching limit should be removed for 401Ks. I also agree that long term savings, including long term capital gains and reinvested dividends, should be tax free. But that's what Roth IRAs without limits would be anyway.

I also think people who have saved enough for their retirement should be able to use those savings for retirement purposes tax free in lieu of SS payments.

But then I also think retirement funds, at least, remaining after death should be taxable to the estate as regular income. I'm really tired of pampered narcissistic trust fund babies thinking they are so entitled.

Increasing the retirement age could help save Social Security, but when people have to work longer before retirement, they tend to cling to their jobs, reducing upward mobility for other workers behind them and limiting the options to people entering the workforce.

A better way to strengthen Social Security is to remove the salary cap of $110,000 on taxable income. I understand that wealthy people may not need Social Security, but taxes aren't just for the middle class, everyone needs to pay. I have to pay taxes to help maintain roads that I don't drive on, that's just the way it is.